To change an organization from within, it helps to understand four basic circulatory systems, analogous to the channels of communication in a living body.

Over the past 30 years, management thinkers have largely come to accept the idea that organizations are not machines; they are as unpredictable, unruly, self-organizing, and even sentient as any living beings. Gareth Morgan, Arie de Geus, Peter Senge, Meg Wheatley, and others have written eloquently about this. Even those who don’t buy the idea of organizations being literally alive are bound to agree when writers such as Jon R. Katzenbach and Zia Khan (in their book, Leading Outside the Lines: How to Mobilize the Informal Organization, Energize Your Team, and Get Better Results [Jossey-Bass, 2010]) suggest that hard-nosed, engineering-oriented leaders need to develop virtuosic skill at managing the informal, personal aspects of a company. In other words, although organizations may not literally be alive, when it comes to running and changing them, they might as well be.

In that light, the primary organizational challenge facing any business leader is much like the challenge facing a parent: to understand this living entity, placed partly in your care, well enough that the moves you make will lead to productive growth and change. And although there is a body of theoretical work on living systems (including that of Chilean philosopher Humberto Maturana) to draw on, those writings have little to do with the day-to-day realities of a product launch or a project team.

But there may be some help in the rough resemblance between biological circulatory systems and the way that information travels in organizations. For example, some of the most interesting and accessible writing about the human body (at least to a layperson like me) has to do with the interlinked bloodstream, neural networks, and chemical systems that regulate life. Sherwin B. Nuland, a Yale University–based surgeon and writer, explains the uncanny responses of human physiology this way in his masterwork, The Wisdom of the Body (Knopf, 1997).

To coordinate all of the instabilities in all of the cells [of the human body] requires that the far-flung parts of an organism be in constant communication with one another, over long distances as well as locally…. This is accomplished by messages sent via nerves, in the form of electrical energy we call impulses; via the bloodstream, in the form of the chemicals we call hormones; and — to nearby groups of cells — via the specialized substances we call local signaling molecules. As each of these methods of communication was discovered, researchers…came to recognize the inherent wisdom of the body.

Nuland portrays the cardiovascular system, the neural network, the endocrine system, and other biological systems as vital channels of communication, exchanging chemical and electrical signals, and thus enabling the health and vitality of the whole. Might something similar be true of companies and other organizations? Indeed, in both management literature and everyday corporate practice, four such systems seem to be consistently important. They are channels through which organizations communicate with themselves; and they each tend to carry distinctly different types of communication.

The hierarchy is a circulatory system for messages of authority; specifically, for anything that can be expressed as a number. It is the means by which the organization seeks scale. It flows from and to the top: the CEO and then the shareholders or owners. It might be analogous to muscle coordination.

The network conveys knowledge — in the form of gossip, guidance, information about opportunities, and anything else that people talk about easily. It is the means by which the organization develops its capabilities. It flows from and to a broad base of people throughout (and outside) the company. It might be analogous to neural networks.

The market is the exchange of goods, services, and money within an organization and its value chain. It is the means by which the organization manages its workflow. It transmits anything that can be bought, sold, or traded, flowing ultimately to the customer. It might be analogous to the cardiovascular system.

The clan is the family or community-like circulatory system, operating below the surface of every organization (and often subconsciously). It is the means by which a company’s culture is maintained, with a “core group” of its most important people at the center. The organization establishes its view of legitimacy through the clan. It might be analogous to the endocrine system.

If you’ve ever tried to change a company, or a part of one, you’ve undoubtedly encountered these systems. But you probably haven’t thought about them as distinct systems, each requiring its own form of intervention to effect change. And that may make all the difference.

The Scale-seeking Hierarchy

Most managers think of a hierarchy as a structure: the lines and boxes on the org chart. But it is actually the communications medium that allows a company to grow to global scale and still stay organized. The eminent business historian Alfred D. Chandler Jr. wrote that the railroad enterprises of the 19th century were the first modern managerial organizations, and their most significant feature was a new form of communication up and down the hierarchies. Owners needed to make sure that overseers and systems were in place to manage the widely dispersed parts of a railroad line, with coordinated methods for scheduling trains, charging fees, and keeping track of profits. Otherwise, the whole system could (literally) crash.

Companies have grown in size and complexity since then, and executives have shaped and reshaped the hierarchical structures accordingly — creating the reporting relationships and financial standards that would maximize control and coordination with the least effort and oversight. Because they are set up to compare data easily and quickly, hierarchies tend to emphasize information that can be easily compared and aggregated: estimates, budgets, operating figures, and across-the-board rules. At the same time, hierarchical structures resonate psychologically with primal attitudes about authority: the king, the boss, and the owner.

To manage hierarchies effectively, you have to learn about systemic structure and design. You have to be willing to put in place the kinds of layers and reporting relationships that make people feel comfortable and willing to contribute. The most credible theorist about hierarchies in this regard was the late Elliott Jaques, who proposed that some hierarchies are “requisite” (well suited to the nature of human beings who worked within them) but that most, in real life, are not. Jaques’s preferred hierarchical design bore some resemblance to the golden mean, the classical ratio used in the design of buildings. A good hierarchy places people at a level of authority consistent with their cognitive capabilities, and it manages them so that they rise gradually through the system as their capabilities increase.

Some things don’t travel well through even a well-designed hierarchy — including in-depth explanations, trust, open inquiry, and knowledge. That’s because the price of great scale is oversimplification. The original local meaning of any given metric may well be stripped out or lost as it is transmitted up, level by level, and combined with others. Judgment and business acumen develop not through rules and regulations, but through personal contact, as people who work together learn from one another. This helps explain why research on strategy execution, conducted at Booz & Company by Gary Neilson and others, suggests that effective cultural change starts not with rearrangement of the lines of an org chart, but with information flow and networks.

The Network

General understanding of the value of networks has increased dramatically since the 1970s, when Stanford University professor Mark Granovetter began to research what he called “the strength of weak ties.” Since then, many people have analyzed the patterns of informal connection among people, particularly in such measurable forms as phone and e-mail contact. As network researcher Karen Stephenson has found, key people in an organization fulfill one of three roles that pop up again and again in the mathematics of human exchange:

Hubs: people who regularly communicate with a lot of other people, and thus act as central nodes for the flow of information.

Gatekeepers: people who provide the only links into a subsection of the organization or a body of knowledge, and thus control access to that domain.

Pulsetakers: people who are relied upon for their perspective, and thus maintain connections to a significant and select group of others.

One can create major improvements in an organization’s effectiveness by aligning and moving people in ways that shift these three important roles. The more effective such channels are, the more people learn how to operate with excellence, how to advance in the company, and how to build their mutual expertise. If you want to make an organization more proficient, start by improving the network.

That doesn’t mean just putting the right people in a room together, but also ensuring they are free to talk candidly and that each understands what the others are saying. Even then, networks are not sufficient for getting actual work done. Contracts, materials, inputs, outputs, capital — the stuff of business — is beyond the purview of a network. Hence the importance of another circulatory system: the market.

The Market-governed Workflow

In the 1980s, W. Edwards Deming wrote about seeing the organization as a system. Like Russell Ackoff, Eric Trist, Eliyahu Goldratt, and many others, he recognized that no matter how many directives came through the hierarchy, and no matter how well people communicated informally, organizations could not succeed unless they kept improving their throughput: the efficiency with which money, goods, and services were exchanged on behalf of customers.

Thus, some of the most effective organizational improvement activity of the past 50 years — from the quality movement to sociotechnical systems to reengineering (when it worked) to lean production — has been in the domain of processes and workflow. People at every step of a lean process are trained to observe, regulate, and contribute to better flows of goods and services. A well-honed lean-production attitude is so ingrained that it goes almost unnoticed. Unfortunately, it is typically noticed in its absence: in the poor quality of a company’s goods and services.

One factor is particularly significant, albeit hard to spot. At every stage of an organization’s workflow, there is an implicit market. Someone (often from another part of the company) supplies a good or service; someone else (usually with a budget) pays for it. As in any other market, the buyer has an opinion on whether the service is worth the price. These opinions may be overridden by company policies, with the result that a purchase price may be set by fiat; but companies that keep the official transactions in line with the implicit opinions tend to operate more effectively. Thus, Caterpillar thrived in part by adopting more explicit internal markets in the late 1980s, and Springfield ReManufacturing Corporation prospered by opening up its financial information in a process called “the great game of business.” Many process design and quality management efforts succeed by making the realities of an assembly line or back office reflect more precisely the implicit worth of the goods and services involved, removing all the nonessential time, effort, and materials (what the Japanese call muda, or waste) clogging up the system.

As in a cardiovascular circulatory system, obstructions can build up. Continuous improvement is the organizational equivalent of a fitness regimen. But even the most effective company can’t rely on continuous improvement alone; there is always a subtle strategic priority that sets the direction of the enterprise. And that’s why it is so important to understand the clan.

The Clan and Its Core Group

If you watch a company at work, you will notice people making decisions on the basis of what they think other people want. “What would Frank think of this?” they ask themselves. “How does this fit with Sally’s plan?” They might say, “I don’t want to be the one to walk into C.J.’s office and say it’s not going to happen.”

Like a community or family, every organization has a clan structure built on the impressions people have of one another. Enough people, enough of the time, facing the pressures of work, make decisions based not on rational analysis (which would be impossible for all the decisions that have go be made), but instead on a mental shorthand, based on the perceived needs and priorities of the people at the core of the company (or their part of it). The “core group” varies from one organization to another; it may include the CEO, local bosses, some key executives, perhaps the head of the labor union or of a critical subsidiary, or someone who serves as an unofficial conscience. Every time people make decisions, even subconsciously, according to “what so-and-so might think,” they improve “so-and-so’s” position in the organizational culture. The result is an ever-changing but continually self-reinforcing core group of people who live in everyone’s mind, akin to the perceived leaders of a family or community. And like a family or community, the organization as a whole will do only what is perceived to be in the core group’s interest.

That’s why “walking the talk” is so important. It matters little what the CEO really thinks. Much more important is what he or she is perceived to think — and where he or she has been seen to pay attention. If the CEO changes his or her attitude in some way, it may take a while for the organization to catch up. Resistance to change occurs not because people fear change, but because they fear the consequences of contradicting the perceived priorities of the core group.

In any organization, the core group might range in number from a handful of people to thousands. (The larger the core group, the greater the organization’s capabilities need to be.) Its members are not necessarily people in authority, though they often are. Some organizations have one stable core group; others have many core groups in constant flux. Some core groups are good for their organizations; others are dysfunctional. But there is no such thing as an organization without a core group. Moreover, behind every great organization is a great core group — and behind every organization in trouble is a core group in crisis.

The clan (or core group) structure might be analogous to the endocrine system. If you want to change a person in a hurry, give him or her a drug. Similarly, if you want to change an organization, make a sudden and dramatic change in the core group. But be careful of overdoses. For what travels through a core group structure easily is emotionally charged information: legitimacy, pride, shame, misunderstanding, and loyalty. Change these cavalierly, and you can send an organization’s morale and performance crashing to the ground.

Putting It All Together

Clearly, there is much more to say, and to learn, about each of these systems. Vast bodies of research and observation relevant to each of them have been developed, drawn from the disciplines of organizational behavior and business management, and from other fields such as psychology, political science, economics, and anthropology. Most of that knowledge is fragmented and unsynthesized; nonetheless, a business decision maker can benefit from recognizing these four kinds of circulatory systems at play, and making moves that address the way they interrelate.

Imagine a manager relatively high in the hierarchy, well connected in the network, solid in the core group — and far removed from the flow of work or the market. This is a bureaucrat. A typical company can afford to keep only a limited number of people in such positions. Now imagine another manager, equally high in the hierarchy, thoroughly immersed in the network, crucial to the market’s workflow — but with no core group status. This individual may be heading for burnout. Such people are often crucial to the organization’s success, but they don’t receive rewards or recognition commensurate with the contribution that they make. There may be a great deal of leverage in two small moves: integrating the first manager more closely with the internal market and flow of work; and figuring out ways to increase the second manager’s perceived legitimacy. (This may include more deliberate counseling about his or her behavior.)

More generally, to develop an effective change initiative in an organization means improving all these circulatory systems, often in a deliberate order. You might start with a network, putting the right people in a room together. Then build on the connections they develop to improve the leanness of the market structure. Next, start thinking carefully about the core group members and how they can improve the way they influence the clan. Perhaps only then will you be in a position to rethink the organizational hierarchy.

Ideally, all these moves would happen iteratively, with enough self-awareness that the whole system would evolve continually, becoming healthier in the process. With an understanding of the circulatory systems, an individual within a company or organization can become an internal catalyst for change — with greater impact than what his or her position in the hierarchy, network, market, or clan might imply.

Author PROFILE:

Art Kleiner is the editor-in-chief of strategy+business and the author of The Age of Heretics (2nd ed., Jossey-Bass, 2008). He is co-leading a seminar, based in part on these ideas, in June 2010 at the ALIA (Authentic Leadership in Action) Institute in Halifax, Nova Scotia.

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